The United Kingdom’s government has reversed plans to cut the country’s highest rate of income tax, marking a humiliating U-turn for Prime Minister Liz Truss’s new administration.
Monday’s move came after more than a week of turmoil in financial markets, which saw the pound plummet to record lows following Chancellor of the Exchequer Kwasi Kwarteng’s so-called mini-budget announcement on September 23.
The package of measures was aimed at boosting growth by cutting taxes and regulation, funded by vast government borrowing, and included a proposal to scrap the top 45 percent rate of income tax paid on earnings above 150,000 pounds ($167,000) a year.
But the plan triggered a crisis of investor confidence in the government, jolting global markets to such an extent that the Bank of England had to intervene with a 65 billion pounds ($73bn) programme to shore up the markets.
Announcing the government’s U-turn, Kwarteng said the proposal to slash the top rate – which made up about 2 billion pounds ($2.2bn) out of the overall 45 billion pounds ($50.4bn) tax-cutting plan – had “become a distraction from our overriding mission to tackle the challenges facing our country”.
“We get it, and we have listened,” he said in a statement released hours before he was due to give a keynote speech at the Conservative Party’s annual conference.
The pound edged up 0.4 percent to $1.120 at 8:25am (07:25 GMT) following Kwarteng’s announcement and yields on UK government bonds fell.
We get it, and we have listened. pic.twitter.com/lOfwHTUo76
— Kwasi Kwarteng (@KwasiKwarteng) October 3, 2022
The decision to reverse course is likely to put Truss and Kwarteng under huge political pressure, less than four weeks after they came to power. The UK has had four prime ministers in the last six politically turbulent years.
Truss, a 47-year-old former foreign minister who took office on September 6 after winning a leadership contest among Conservative members, and not the country, said on Sunday that she should have done more to “lay the ground” for the tax cut plan.
Several senior Conservative legislators had come out publicly against the policy, saying cutting government spending and hiking borrowing to fund tax cuts for the richest was politically risky during a pressing cost-of-living crisis.
Al Jazeera’s Paul Brennan, reporting from Birmingham, where the Conservative’s conference is being held, said the “unpopularity” of the tax cut plan had “been reverberating both in the money markets and throughout the UK”.
“It had left the ruling Conservative Party at record low levels [of popularity] in the opinion polls,” Brennan said.
“Clearly, there was a decision made that this could not go on. So we have this screeching U-turn … it is extraordinary, for a government to have stuck to its guns for 10 days, on this deeply controversial issue and then on the day that the chancellor was due to give his keynote speech to the annual conference of the Conservative Party … he lands this.”
An array of investors and economists said the reversal was a step in the right direction but cautioned the government needed to go further still. It is not due to release a fiscal statement with the full scale of government borrowing and debt-cutting plans until November 23.